Why Disney Is Attracting Fresh Attention On Wall Street

The noise and excitement over the speculation that Disney is interested in acquiring Twenty-First Century Fox has almost faded but that doesn’t mean a deal couldn’t happen. Fox has kept silent and Disney CEO Bob Iger has specifically stated, when asked by CNBC for comment, that he “couldn’t talk about that matter.”

Obviously his statement isn’t a denial of CNBC’s David Faber’s scoop that Fox and Disney "have been holding talks to sell most of the company to Disney.” If the story were’t true, Iger could have just “no,” or could have added for further clarity that “it’s a ridiculous speculation.”

Based on Faber’s reporting, it appears there is plenty of meat to the story, and, to ne sure, acquiring Fox or most of its assets would be a bonanza for Disney.

What specifically is the advantage for Disney to own Fox? “A generational transition to Lachlan and James (Murdoch) could be sparking new openness to change,” argues Barton Crockett, analyst at investment firm B. Riley FBR. “Fox has struggled some in movies, where Disney has excelled…. and Fox could also be thinking that it’s better to partner than fight.”

Thematically, Disney acquiring most of Fox “makes sense,” adds Cockett. He believes that traditional media needs to bulk up to gain scale in order to compete directly with the Internet giants as well as with Netflix, which are outspending everyone, and, indeed, activity is picking up, with mergers of content (Discovery/Scripps and Sinclair/Tribune), distribution (Charter/Time Warner), and both (AT&T-Time Warner)."

But many Disney bulls on Wall Street believe that as meaningful as Disney’s possib;e purchase of Fox might be, such a deal would simply be a huge additional boost to the Mickey Mouse company because it is already on the pathway to expansion and global growth as it is.

“We continue to favor Disney’s attractive long-term earnings and free cash-flow outlook," says Alexia S. Quadrani, analyst at J.P.Morgan Securities. And “we are impressed by Disney’s distinctive brands and assets with high barriers to entry that add confidence in the longer-term earnings growth outlook,” she points out. And Quadrani expects Disney to leverage its "industry-leading content to partially offset traditional subscriber declines with established rate increases and growth in OTT.”

She acknowledges that the changing ecosystem and subscriber declines could "remain a headwind for Disney’s cable network’s growth. “However, we believe Disney is best positioned among its peers and an industry leader in the digital transition with some of the most highly demanded content.”

So Quadrani is maintaining her 2018 year-end price target for the stock of $125 a share, based on a forward valuation of 19 times -- a premium to the stock’s current price-earnings multiple, applied to her 2019 earnings estimate of $6.50 a share. “We see this valuation as warranted, says Quadrani, "despite current concerns around subscriber declines and potential incremental near-term content investments.”

Disney is taking the right steps, she argues, "to position its business for the future and a healthy longer-term earnings/free cash-flow growth outlook that sets the company apart from its media peers.”

Indeed, investors who are snapping up Disney shares are “investing for a future,” asserted Doug Creutz, analyst at investment firm Cowen. “We believe Disney is well managed and has many attractive content assets,” adding that “we actually view ESPN as a better network than most peers, and we believe the market may have become too negative on its prospects.” At the same time, however, he also warns that Disney’s studio profits look unsustainably high, and that "P&R profits remain vulnerable to an inevitable recession." Creutz has a price target of $103 a share, although the stock already closed at $102.64 on Friday.

Stan Meyers, senior analyst at investment firm Piper Jaffray, points out that Disney’s fiscal fourth quarter results were adversely affected by the company’s recent investments in BAMTech and Hulu, as well as the lower ratings at ABC/ESPN, plus the horrible impact of hurricane Irma. But Meyers adds that “we continue to believe Disney’s IP will drive significant value over the next five years despite the decelerating pace of growth at ESPN and the recent investments into direct-to-consumer products.”

Meyers also argued in a recent report that Disney "remains best positioned in the current fragmented media landscape to leverage its content across a growing number of distribution channels, its own global theme parks and consumer products.” Management has announced that Disney is producing a new Star War trilogy and that its own branded streaming service will be priced “substantially below" Netflix’s. Meyers rates Disney’s stock as “overweight,” with a price target of $120 a share.

So while the fiscal fourth quarter results were “a mess and a miss,” as described by Steven Cahall, analyst at RBC Capital Markets, the focus shifts to fiscal 2018, when he expects Disney will execute its way to multiple expansion. Disney is a “top pick” at RBC Capital Markets, with a price target of $125 a share.

The fourth quarter was a "pivotal quarter for investors to get through, as fiscal 2018 (ending Sept. 30) earnings are firmly in view (and Star Wars ahead).” Cahall points out that Disney’s balance sheet is “very healthy with a potential for upside from a bigger buyback — or M&A."

I wrote the Inside Wall Street column at Business Week Magazine for 28 years, through December 30, 2009. It was one of the most influential market columns as it moved stocks that I highlighted each week. BW had a yearly ScoreCard Report that tracked the performance of the st...